Archive for the ‘Behavior Eco/Fin’ Category

Interview of Prof. Richard Thaler..

October 23, 2013

Minneapolis Fed’s Region mag has this terrific interview of Prof. Richard Thaler.

The interview as expected questions the basis of the rational school. It is full of anecdotes over how he met Kahneman/Tversky, his struggle to get into mainstream economics, his venture into behavioral finance (he never imagined that it will be finance where behavioral theories  will have the maximum impact, his disagreements with Fama and so on.

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What it is like to attend Prof. Shiller’s class and his India connection..

October 16, 2013

Monica Halan of Mint was a Yale World Fellow in 2011 had the privilege to attend Prof Shiller’s class.

She narrates her experience which looks like lot of fun.

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Post 2013 Economics prize.. Will we see behavioral finance becoming a core course?

October 15, 2013

The mind is overjoyed on hearing that finally Prof. Shiller has won the coveted award. This blog is a big fan of behavioral economics/finance and keeps looking at research/events which show exciting applications of the field.

He along with a few behavioral guys have withstood this pressure from the rational/classical school of finance for many years now. One thought post 2002 prize to Kahneman one would see rise of behavioralistas  but this did not really happen. One continues to see the econ/fin schools being dominated by the rational world. Interestingly, the Fisher Black medal for 2013 given to top finance economists was also given to Ulrike Malmendier, a behavioral finance prof at UCB.

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Can we predict asset prices even over a long-term?

October 15, 2013

The committee releases superb summaries of  works of winners of “The Prize”. This year is no different.

I have so far only read the popular version as adv version is too detailed.

The popular version begins like this:

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Behavioral economics and RBI’s move to ban zero financing on consumer durables…

September 27, 2013

RBI recently banned banks from offering 0% EMIs on consumer durable products. It also asked various merchants not to deduct a fee while someone pays from his debit card. It is nothing new and RBI had asked banks to stop this practice even earlier.

In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of processing fee. Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable RoI charged on the product. Since the very concept of zero percent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product/segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers. The only factor that can justify differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile.

Though many banks have appreciated our concerns and have discontinued with the above mentioned practices/ products, some of them still seem to persist with them. These practices/ products thwart the very principle of fair and transparent pricing of products which beholds customer rights and customer protection, especially, in the more vulnerable retail segment. Such practices thus violate, both in letter and spirit, various provisions of our MC on Interest Rate on Advances and therefore, you are advised to strictly desist from these practices hence forth.

ET has this edit on the move and as always criticises the move (as ET is strongly pro-markets):

The RBI has done immense disservice to industrial growth in the short term by asking banks not to offer popular financing schemes for consumer durables dressed up as zero-interest equated monthly instalment (EMI) schemes. Industrial growth has been extremely weak for an extended period and the forthcoming festival season is an opportunity for assorted consumer durable companies to step up their sales.

The zero-down-payment, zero-processing-fee, zero-interest EMI schemes an increasing number of companies offer on a variety of products are good for both consumers and for companies. The RBI’s move scuppers this opportunity to a large extent.

It is not the case that consumers are unaware that these financing schemes entail real costs on account of interest and documentation. They are aware that credit card-issuing banks charge a financing cost that product companies bear, to tempt consumers with “zero” offers. But this is not their concern. Nor should it be the RBI’s. If the RBI is worried about the rates banks offer, it is welcome to examine the banks’ books and ascertain if any rule is being violated.

Why should the bank regulator interfere with the behavioural economics at work when consumers prefer “zero” finance options on a higher price that bundles financing cost with the product price to the transparency of a lower product price and an explicit overlay of financing cost? Nor are consumers irrational. The cost would be lower, when borne by the company for multiple transactions all together, than when financing is offered to individual consumers.

It says Nor are consumers irrational..Really ET?

Well it seems the lessons from history have been forgotten very quickly. The several Americans who took sub-prime loans also were rational and did not need any intervention. Right? Wrong! The regulator is not interfering with bvevioral economics but is following behavioral economics. The field says we need to nudge when expectations are going crazy..

Further:

The only beneficiary from the RBI’s move is the buyer with sufficient purchasing power to not need a financing scheme, now that the product would be priced lower, taking out the financing cost by which price had been marked up earlier. Product sales and industrial growth would suffer, for the benefit of a tiny elite. This is a fetish for transparency that benefits no one except bean counters at the RBI. The RBI should withdraw these strictures gracefully and wish the economy a Happy Diwali.

Well it is fetish for growth which is the problem. Growth shd come at whatever cost. RBI is trying to not spoil Diwali but prevent Diwala (not literally though)… It is not asking people not to buy products but simply making sure people know the hidden costs. This is something rational people assume are not there but real world shows there is plenty of it..

Behavioral economics has shown the problems with the rational thinking and the crisis showed how rational people are..How many events do we need to debunk the idea of consumer rationality?

IIMB students nudging to collect more aid for Uttarakhand..

July 2, 2013

Noticing some interesting nudges at IIM Bangalore (IIMB) like labeling bins seperately for waste food/utensils.

The best nudge I witnessed was by Vikasna, social service initiative undertaken by the students of IIMB.  In order to collect more aid for Uttarkahand disaster, they had to make 2 choices:

  • Standard : Ask students to contribute their chosen amount. In other words, students given a choice to tick-in to the aid option.
  • Based on Nudges : Just deduct a certain amount from all students’ monthly mess bill. Those who wished not to contribute for the fund, had to opt themselves out from the aid option.

The wise men chose the second option!  I am told it worked wonderfully with only a few opt-outs. Further, it was not really implemented post reading Nudge/or some other beh econ paper. The committee just thought that people do want to contribute but are lazy/don’t get time types and unable to work on the first option. So unlike what the rational school thinks, these ideas are pretty natural to come as well.

Nice bit..Could be applied at other places as well..

A day in the life of a behavioural economist..

May 13, 2013

A superb post by  of Worth a lot Canadian Blog.

She points how one struggles to stay focused despite being a behavioral econ. Quoting the whole post as it is:

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Why Paternalism is your friend?

April 15, 2013

Cass Sunstein (co-author of Nudges) writes this nice column on the topic.

I was not aware of this distinction. He says we can use nudges for two purposes – means and ends:

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Economics of food buffets…(Could we use some Nudging?)

February 15, 2013

Another brilliant piece by Vandana Vasudevan of Mint. I had commented on her earlier column on Rajdhani Express as well. Such pieces help you think about applying economics at all times..

She points there is something about food buffets. We eat too much in buffets:

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5 Weight Loss Tips From Behavioral Economists..

February 15, 2013

There you go.

Carmen Nobel does a real noble task of summarizing give res papers from beh eco area which provide tips on losing weight.

The tips are:

  • TIP #1 – Order your groceries a week in advance of delivery.
  • TIP #2 – Put your money where your mouth is.
  • TIP #3- Fill your backpack with rocks
  • TIP #4 – Put your hands on your hips a la Wonder Woman.
  • TIP #5 – Ignore your lazy colleagues.

It links the papers as well which lead to these tips. Nice read..

Will economics textbooks change in next 30 years??

February 12, 2013

A depressing at the same time hopeful article by Prof. Barry Eichengreen.

He points that there was a session in recently held World Economic Forum over state of economics textbook. Will it change post crisis? The depressing bit is that most econs feel there is no need for a change. Hope bit is Prof. Eichengreen feels it is due for a change and it will change. Like all technologies change overtime despite pessimistic expectations, same is the case with econ text-book as well.

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Understanding financial crisis via Card Games…Bridge players vs Poker players

January 23, 2013

A terrific paper from Leonardo Becchetti, Maurizio Fiaschetti  and Giancarlo Marini ( Economics dept, University of Rome).

In card games, bridge players are seen as more team-believing and altruistic. In poker games, players are seen as individualistic and selfish. Apparently Akerlof and Shiller in their famed book suggested that there are more poker players these days which has led to current bad practices in financial markets.

The authors evaluate this hypo of  Bridge/ Poker players being more trustworthy/selfish. They find the hypo to be true:

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Nudging to make MDGs more effective..

January 22, 2013

Nice paper by Varun Gauri of WB.

She proposes using the Nudge approach to simplify MDGs. This will make countries adopt them better:

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A Psychological Perspective of Financial Panic

January 14, 2013

Nice paper by Anat Bracha and Elke U. Weber of Boston Fed.

They look at financial panics from a behavioral perspective:

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Changing the nudge on Rajdhani Express..

January 7, 2013

A nice article in Mint on last Friday by Vandana Vasudevan.

She laments her experience in Rajdhani Express (a premium rail service in India for connecting major cities with New Delhi).  She finds the food given in the Express bland and boring:

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30 Years of Prospect Theory in Economics: Mixed experience

December 26, 2012

An amazing paper by Nicbasics holas Barberis of Yale (free version here).

He says despite 390 years and usefulness of Prospect theory, its applications have been limited so far (mostly in finance and insurance). However, things are looking better with some researchers looking at applications in other fields:

Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis.

 Apart from  PT’s applications, paper also explains basics of PT. It has four elements:

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HongKong Monetary Authority and Consumer Protection: Mix of traditional and behavioral approaches

December 17, 2012

Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority gives this speech on consumer protection in financial products.

HKMA has an interesting strategy of consumer protection. It is a mix of classical and behavioral approaches to fin reg:

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Behavioral economics in design of public policy..

December 3, 2012

A comprehensive and must read review on how behavioral economics can help in public policy. It is by Saugato Datta and Sendhil Mullainathan.

It looks at how  behavioral research findings can be made to use economic policy more meaningful and effective:

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How is neuroeconomics faring?

November 20, 2012

Most must have seen it. In case not this is a good read by Josh Fischman on state of neuroeconomics (HT: mankiw’s blog). As you go through the article you can relate neuroeconomics what happened to beh eco when it started..

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Indians are using the lessons of behavioral economics to nudge citizens …

October 29, 2012

An article which gets a huge thumbsup from this blog.

It mentions couple of areas where FinalMile, a firm has used beh eco to nudge citizens into better decisions:

  • Prevent people from crossing railtracks (covered earlier as well). Though I would love to see an empirical study on this experiment to back the claims.
  • Road safety
  • Garbage

Great to know all this and hope to read much more in future..


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